From Arabnews.com: The question of late payments, defaults and compensation is potentially just as problematic for Islamic banking and finance as it is for the conventional financial sector. The major difference is that Islamic banks cannot penalize defaulters or late payers through the interest mechanism because it would be against the ethical principles of Islamic finance which expressly prohibit the giving and receiving of Riba (interest).
The Shariah objection to interest that is fixed and pre-determined and the borrower or partner is liable to pay interest no matter what his or the business performance is. In Islamic finance, investors and users of capital share in the risk and reward of an enterprise or transaction, with the bank acting as a Mudarib, the manager..............................................Full Article: Source